- Goldcorp missed guidance in 2014 and had weak results in Q1/15 which definitely has weighed on the share price. However divestitures and the dividend cut will increase free-cash-flow to $900 million.
- Eleonore definitely alienated shareholders as it took so long to come on stream. Now production is ramping up to what will become 500,000 ounces a year by 2018.
- Balance sheet is in far better shape than 18 months ago when it made a hostile bid for Osisko. Now it has the financials to pick up assets on the-cheap.
Goldis continuing its rally and is now trading at $1,134 an ounce. If indeed we marked a bottom a few weeks ago (which by the day looks more likely), I would warn investors not to try and time this market going forward. If indeed we have started a new bull market, gold could easily rally $20 to $30 in a day which would make the market very difficult to chase. Surprises happen to the upside in bull markets which is why they are always very difficult to time. If however, you are not convinced, a move above $1225 (see chart) would confirm a higher high (something this market has not had in years)
I however feel the bottom is most probably in which is why I have decided to increase my longs in this sector. One stock I like is Goldcorp (NYSE:GG) as I feel it is slightly undervalued compared to its peers in the mining sector. Let's explain why..
Firstly this stock has been beaten up pretty badly (compared to its peers) since the start of the year with its share price down almost 20% already year to date (see chart). It has even underperformed the general mining index Market Vectors Gold Miners (GDX) which definitely has left many investors disappointed.
The company missed guidance in 2014 and a set of poor Q1/15 results has seen the Goldcorp stock underperform in comparison to its peers. Nevertheless the company is on course to meet guidance levels this year even though the average spot price of gold is lower so far as compared to last year. Investors in the past were bearish on this stock due to its debt levels and negative free cash flow. However, second quarter earnings for this year revealed a positive free cash flow of $174 million and falling long term debt. Furthermore the company cut its dividend by 60% which will save another $300 million on an annual basis. Combine all of the above with lower all in sustaining costs compared to 2014 and you are looking at a much better balance sheet than 2014. I feel investors will wake up to this new reality soon enough and send the shares higher.
Secondly investors decided to ditch this miner in recent times because of the delays the company had in bringing its mines to production. However Éléonore in Quebec and Cerro Negro in Argentina are finally in production mode and have ample runway for production growth. Eleonore for example is expected to reach higher ore grades shortly which will spike production at the end of this year.
Elenore produced more than 40,000 ounces in the 2nd quarter of this year (see chart) but this is nothing compared to the expected 500,000 ounce it will produce by 2018
The more the mine produces, the lower will be its all in sustaining costs (AISC). Final AISC are expected to come in at under $800 an ounce which would make production profitable even at today's gold prices. Elenore's major problems seem to be definitely in the past
Goldcorp has always been an acquisition focussed company as it has always preferred buying assets with proven reserves rather than doing the exploration work. It must be said that Goldcorp's hostile bid to acquire Osisko last year (April 2014) definitely hurt the stock price as shareholders felt that the balance sheet wasn't strong enough to warrant a $3.6 billion acquisition.
Nevertheless 18 months later and this company is in a far healthier position. Net debt levels have contracted to $2.5 billion and Goldcorp free cash flow for this year is expected to come in at $900 million. Add to this the $940 million in cash it has on its balance sheet and the $3 billion undrawn credit facility and you are looking at a far different Goldcorp than what was 18 months ago
To sum up, out of all the large cap mining companies, this company seems to have the best financials. If things get worse in this sector, I see Goldcorp acquiring more assets on the cheap as most of its competitors are merely selling off non core assets in order to stay afloat.
I can't stress enough the importance of growing production in this sector. If the gold price retreats to under $1,000 a ounce, many of Goldcorp's competitors will have to cut production because of over leveraged balance sheets. We have seen down through the years that when companies start cutting back substantially on capex commitments, it can take years for the respective company to recover to former levels. Goldcorp has the financials to pull through which is why in my opinion this company is an attractive risk reward investment at this time